The smart way to borrow money in an emergency

Need money now? If you’re in a tight spot because of COVID-19, you’re not alone and help is available. Here’s everything you need to know.

Before you borrow

Remember: Borrowing usually costs money, so only take on debt as a last resort and borrow as little as possible to minimize interest charges. Before borrowing, make sure you’ve reduced your expenses, accessed any available savings or investments, explored ways to supplement your income and exhausted all financial aid options.

Your borrowing options

In general, the lower the interest rate on the loan, the better. Fees, the repayment period and availability are other important factors to consider. Here are the options that we recommend, listed in order of preference:

Loans from family or friends

We know this isn’t possible for everyone, but if you’re lucky enough to have someone who can help, reach out. These loans usually come with a very low (or zero percent) interest rate, no fees and flexible repayment terms, which make them the best option for borrowing money. 

Mixing money and personal relationships can be tricky, though. Here’s some guidance on how to respect and protect relationships when borrowing from a loved one.  

Home Equity Line of Credit (HELOC)

If you have access to a HELOC, then this is probably the next best option. This flexible, low-interest loan uses your property as collateral and allows you to borrow up to a pre-set amount. You only borrow what you need, and you only pay interest on what you use. Since it’s a secured loan, interest rates are usually lower than regular lines of credit.

Opening a new HELOC can take time and cost money, so it’s likely not the right choice if you need cash immediately. But if you’re a homeowner with 20% equity in your home and you can afford to wait, the low interest rate makes it worth considering, especially with the recent rate cuts by the Bank of Canada.

Unsecured line of credit

An unsecured line of credit is a smart choice if you don’t already have a HELOC or real estate to borrow against. Since this kind of loan doesn’t require any collateral, it’s generally quicker to set up and easier to access. Interest rates vary but generally fall somewhere between HELOC and credit card rates. You’re more likely to get a favourable rate if you work with your current bank, and they may even be willing to transfer overdraft fees from your existing chequing account to your line of credit.

Low interest credit cards

If you don’t have access to a line of credit, a credit card may help with cash flow. The big six banks are offering to lower interest rates for anyone who has been approved for payment deferrals. Interest rates will likely still be above 10%, so be careful about how much you put on your card.

Use a comparison tool like RateHub or LowestRates to find the best low fee, low interest credit card for you. If you have existing credit card debt, look for a card with a 0% introductory interest rate on balance transfers, like this one. There may be a fee, but you’ll still save money by not paying interest on pre-existing credit card debt during the promotional period. Also, be sure not to use cash advances from your credit card, as these often have a much higher interest rate than the standard annual interest rate promoted by the credit card issuer.

What to avoid 

We recommend that you stay away from payday loans, RRSP withdrawals, and tax refund loans. Here’s why.

Avoid payday loans at all costs. We repeat: Avoid payday loans at all costs—especially in the current environment. As the name suggests, these loans are short-term advances for money that’s coming on your next payday. If you’ve lost your job and don’t have work lined up, the high fees and interest rates could make a payday loan very expensive. It might not seem that expensive in dollar terms if you only borrow for a few days, but the effective interest rates charged can be as high 500 to 600%.

A tax refund loan, or short-term advance on your estimated tax refund, might seem like a good idea, but we don’t recommend it. There may be high fees associated with this service, and you could end up owing money if your estimate is incorrect. 

Don’t make an RRSP withdrawal. There are penalties associated with making early withdrawals from your RRSP and any money you withdraw is considered taxable income. You’ll also permanently lose the contribution room.

Get financial advice 

Ultimately, the smartest option for borrowing money is the one that works for you. We each have unique financial situations, and there is no “one size fits all” solution for finding ways to overcome the financial challenges that may lie ahead. We recently rolled out a new service which makes it possible to get financial advice in the app, and we’re hard at work expanding our capacity to offer it to all of our users.

This feature gives you access to real-time live chat with an expert financial advisor who can answer any questions that you may have about your personal finances and help you make the best possible financial choices. Join the waitlist today